Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Monday, May 6, 2013

Chutzpah Economics

It is nice to see that Paul Krugman learned his Yiddish as a young man, although I'm afraid that he is accusing the wrong people of having chutzpah. You see, when an economist claims that the cause of economic malaise is the lack of "enough" inflation, it seems to me that we are seeing chutzpah on steroids.

At this point the economic case for austerity — for slashing government spending even in the face of a weak economy — has collapsed. Claims that spending cuts would actually boost employment by promoting confidence have fallen apart. Claims that there is some kind of red line of debt that countries dare not cross have turned out to rest on fuzzy and to some extent just plain erroneous math. Predictions of fiscal crisis keep not coming true; predictions of disaster from harsh austerity policies have proved all too accurate.

I'm not sure what Krugman means by claiming that the world is in "austerity" when national governments across the globe have accelerated spending and especially borrowing. But then, I have to remember that according to Krugman, the difference between this recovery and other recoveries that actually were "recoveries," is the lack of spending by state governments. State governments cannot print money, and there are borrowing restrictions (state and municipal governments cannot pay back bonds by issuing other bonds -- it's called fraud). Thus, when the economy is weak, state revenues are relatively lower than they are in good times.

As anyone can see, such a situation is the result of an economic downturn, not its cause, yet Krugman insists on turning cause-and-effect upon its head, at least when it suits his point of view. Governments as a whole create little economic wealth, and instead are huge consumers of wealth. Yet, as I read Krugman, he seems to believe that the very act of spending is, in fact, a form of production. In his view, when governments borrow huge amounts of money for consumption purposes, and when governments impose taxes upon private economic production, such things are the epitome of government responsibility.

True, Krugman writes that during "good" times, governments should pay down debt, but he never explains how it is that we will sustain such "good" times for any length of time. Krugman's hostility toward private enterprise is evident (unless the private firm is being subsidized by the government and engaged in outright crony capitalism). I cannot understand how he believes that private enterprise activity could keep an economy going for more than five minutes, given the Keynesian viewpoint that private enterprise creates underconsumption.

I do need to add the following point: Krugman is right in saying that the Republican conservatives are hypocrites in the worst kind of way. The Reagan and Bush (both) administrations were profligate, and none of them were "austerians" in any meaningful way. This did not keep Progressives from claiming that they were running "austere" governments. I remember the howling from the New York Times and CBS News (especially Bill Moyers and Dan Rather) about Ronald Reagan's supposedly austere budgets, even though welfare spending grew in real terms while Reagan was president.

And who can forget the "three million homeless" hoax during the Reagan years. We were told that the spending cuts were so severe that millions of people were on the streets, out of work and living in shelters or worse. My favorite line on this came during one of the Dukakis-Bush debates when Dukakis declared, "There are three million homeless people in America, and a third of them are Vietnam veterans."

I quickly checked some sources and found that about 4.25 million people served in that war, so Dukakis wanted us to believe that nearly a quarter of Vietnam vets were on the streets. And the reason given was that the Reagan administration allegedly was spending less on public housing, as though there suddenly were three million fewer public housing units in the country.

No one is making those claims today, but the idea that the Obama administration is an "austerity" government is a howler. Furthermore, the proclivity of politicians is to spend, and Krugman wants us to believe that politicians all over the world are closely watching the "90-percent threshold" set by that space alien himself, Ken Rogoff, and then spending less.

Although Krugman's words may seem to be hyperbole, there is true method in what he is saying. No matter how much money the government borrows, prints, and spends in search of a fiscal policy that Krugman will accept, it never will be enough spending. Why? Because this spending is not going to bring about a real economic recovery, and according to Krugman's logic, the economy in a "liquidity trap" will recover only if government spends enough. The Debt Fairy will be successful only if the fairy can be given enough steroids.

If this looks like heads-I-win-tails-you-lose logic, then move to the head of the line. If Krugman is claiming that it takes chutzpah to claim that governments cannot spend a country into prosperity, then he truly has redefined the meaning of that word.

You see, by invoking his third fairy, the Spending Fairy, Krugman is the one showing chutzpah. Why? He is the one who truly believes that we can totally uncouple government spending from any constraints that an economy lays upon it.

40 comments:

Salamano
said...

Quick check and a note:

Check: In your post, you said that "4.25 people" served in the war. I'm assuming you meant million.

Note: In the last month (I forget which columns but it would have been good to save it), Paul Krugman has said on separate occasions that the best ammo the government can do, besides print money, to fiscally get the job done in the down times is Tax Increases... and when times are good, to get the job done correctly: Tax Increases.

Krugman told me in 2004 that the high marginal tax rates pre-Reagan were "insane," but now he seems to be endorsing them. Given that overall effective tax rates for a lot of people are well above 60 percent, the government has managed to make up for what allegedly was lost ground when tax rates first were lowered 30 years ago.

Do you really think that Krugman does not know that what he is saying is bullshit? The economics he is talking are very unlogical and naive. Do you think he is like that? Of course not. He is very clever and cunning. He has another agenda.

William L. Anderson: Yet, as I read Krugman, he seems to believe that the very act of spending is, in fact, a form of production.

No, it's a form of demand. The result of that demand may or may not result in an overall increase in production, depending on the economic conditions.

William L. Anderson: True, Krugman writes that during "good" times, governments should pay down debt, but he never explains how it is that we will sustain such "good" times for any length of time.

Markets, which tend to be self-regulating within certain parameters.

William L. Anderson: I cannot understand how he believes that private enterprise activity could keep an economy going for more than five minutes, given the Keynesian viewpoint that private enterprise creates underconsumption.

Market economies can result in underconsumption, but that also depends on the economic conditions.

Can you explain why you actually think Krugman's analysis of a liquidity trap and lack of aggregate demand driving the Recession is wrong? I understand you believe his views are ridiculous, but i can't tell why you believe it. To me, he writes relatively persuasively, seems to marshal evidence, and has made a series of generally correct predictions over the last five years, while predictions by conservative economists, inflation, economic collapse in the U.S., improved conditions in England, etc, seem, at least to a layman, to have been way off.

To me, he writes relatively persuasively, seems to marshal evidence, and has made a series of generally correct predictions over the last five years, while predictions by conservative economists, inflation, economic collapse in the U.S., improved conditions in England, etc, seem, at least to a layman, to have been way off.

Which Krugman predictions have been correct? Which "conservative" predictions have been wrong? By "conservative" do you mean (erroneously) Austrians? Or do you mean the columnists at the Weekly Standard? Or do you mean the risible straw men set up by Le Krug Himself?

If you truly find Krugman persuasive, perhaps you could tell us why, rather than asserting the fact of your persuasion as a problem for the rest of us.

Well, I meant generally Krugman's predictions re the effect of the Obama stimulus, U.S. ability to borrow at low rates, deflation (actually not quite correct as we've instead had low inflation), and the effect of European efforts to cope with the recession, particularly in Greece, Ireland, and England. On the conservative side, I meant predictions of extreme rates of inflation, American economic collapse from the size of the deficit, etc.

Also, I really am not trying to pick a fight here. I'm not an expert. I've been reading Krugman's columns, this blog, and Robert Murphy and just trying to get a feel for the merits of the arguments. I am not easily able to judge between the various positions.

"I cannot understand how he believes that private enterprise activity could keep an economy going for more than five minutes, given the Keynesian viewpoint that private enterprise creates underconsumption."

No, isn't, and this shows how little you know about Keynesianism.

Keynesian says that market economies can and do suffer from lack of aggregate demand (AD), which is not underconsumption.

Investment is the most important of the three. Keynesianism has always been about investment: most of the GT is devoted to investment.

When George L. S. Shackle summed up the essence of Keynes’ theory he invoked investment:

" [sc. Keynes’s] ... theory of involuntary unemployment is perfectly simple and can be expressed in a paragraph, or in a sentence. If you express it in a sentence, you simply say that enterprise is the launching of resources upon a project whose outcome you do not, and cannot, know. The business of enterprise involves investment, the investing of large amounts of resources--huge sums of money--in things whose outcome you cannot be certain of, which could perfectly well turn into a disaster or a brilliant success.

The people who do this kind of investing are essentially gamblers and they can lose their nerve. And if they decide to withdraw from trade, they sweep their chips up from the table. If they decide it’s too risky, if their nerve gives out and they can’t bring themselves to go on investing, they cease to give employment and that is the explanation.

Hate to say it on this blog, but LK is correct. Most of the General Theory is about Investment. Business cycles in Keynes' world come about through a lack of demand from all sources (government, consumers, investment etc.) This comes about due to a stockpiling of inventory.

I think this idea of inventory adjustments is why many populists equate production with consumption.

But the lack of investment can come about from a number of sources, only one of which is low consumer demand.

Low investment will generally occur when the assumed return on projects does not equal a specific benchmark. Lower interest rates will push down that benchmark and high consumer demand will push that up. But a whole lot of other things - expectations, regulations, lack of "animal spirits," high taxes, you name it will also have an impact.

Problem with "the great one" is that he is a one trick pony. He got his talking points from the Party and he is going to darn well stick to them come hell or high water.

Understand that the Keynesians measure capital development in what is spent, not what capital actually does. Furthermore, to them consumption is not a purposeful activity; it is spending, and the spending is what clears the shelves to that people can put more stuff on the shelves.

Believe me, LK, I understand the Keynesian issues quite well. I deal with the implications of the policies, not what Keynesians believe the policies will do.

Keynes wrote that business investment is volatile because of the "animal spirits" of investors, and the ups and downs of investment spending are major contributors to business cycles. Of course, that is not capital theory.

And I quite well understand the liquidity trap and the supposed implications. And I also go along with Rothbard's attack on the whole issue of the liquidity trap.

Reading his column gives a highly distorted perspective. Like the talk show "Psychic" John Edward, he talks up his hits and completely fails to acknowledge his misses.

Personally, from reading his column fairly regularly and reading as many other sources as possible, I have not seen much in the way of "hits". He completely failed to predict the housing bubble and subsequent financial collapse, unless you count "cheering it on" as a prediction of sorts.

Also, the results in Europe depend on how one defines Austerity. If you define Austerity as actual CUTS in spending, then the Baltic States of Latvia, Lithuania and Estonia are the only ones practicing it, and they also have the highest growth rates. If you define it as "slight cuts to future increases, which still amount to record spending", the situation becomes a little murkier.

First of all, I am a Conservative. Second of all, I dislike what Bush did, and am indifferent to what Reagan did in economic terms. I am abhorred to how Obama has handled things and actually think Clinton did the least harm.

So as a Conservative I will tell you what I think will happen due to the Federal Reserve and Obama's tinkering with the market place.

First I think that they have increased inflation by a large amount ( not CPI which is a different beast all together ) but rather the amount of money that is bouncing around in the financial world right now. I do not see a safe way of extracting that money if things go badly or even if things go well.

Many people point to the fact that there is a recovery and that Obama has been at the helm of it. SO what? There would have been a recovery if a monkey had been at the helm of this government. In fact had there been a monkey we might have had a faster recovery rather than all the 'hope and change' that has taken place which people are still trying to figure out how it is going to effect them financially moving forward. I have not hired a regular employee for almost a year now taking on contract work instead. Or I have hired firms from over seas to complete longer term contractual work even though I fell they offer an inferior product and the cost is relatively the same when I account for the increased time in communication and rebuilds.

Anyway that is simply anecdotal on my end lol. The point is that any economy when it falls will then go through a trough until we reach a recovery and I do not care WHO is at the helm eventually it will occur. Even the market in the USSR moved forward one year to the next. The economic system being used does not preclude economic expansion rather it can simply limit the amount of innovation and increase in productivity that can occur.

As far as Austerity... When is a balanced budget Austerity? Austerity is when you have $100 in revenue and only spend $90 and do not use the $10 to pay down debt OR use it to give tax cuts.

That is 'Austerity' where you hold onto capital you NEVER intend to allow back into the market and let it pile up and sit. What Apple is doing is Austerity.

The “liquidity trap” is just another typically garbage Keynesian anti-concept intended to confuse and mislead. Like “aggregate demand”. It only makes sense if you have foolishly bought into the infantile Keynesian idea that “the economy” is like a wind-up toy that somehow needs an external source of specially anointed “experts” to keep it spinning. The artificial boom occurs when banks create and lend money out of nothing which allows the first receivers of such new money to artificially bid-up prices. One is almost compelled to join in the Keynesian-induce inflation speculation because otherwise, your purchasing power will be steadily stolen. Because prices are distorted by this process and no longer reflect the true unadulterated values of the underlying goods and services, the price, investment and capital structure is unsustainable, as is the debt structure. When the boom inevitably fails, people attempt to reprice most everything to reality-based unadulterated prices which are generally much lower than the adulterated prices. That essential repricing and cleansing process is what the Keynesians are most hysterical to prevent. During that process, and before it is complete, most people can see that it would be unwise to borrow money before the lower prices have been set. Thus, as the Keynesian-induced mess is healing, there will be little new borrowing or projects started. Instead of waiting the short period for the healing to be completed with the new, reality-based unadulterated prices, the Keynesians (knowing they cannot induce a new unsustainable Keynesian bubble in the short run) insist upon new government spending to further muck up the repricing and healing process.

That’s the “liquidity trap”, that short period of time during the repricing period when people are too smart to engage in a new unsustainable Keynesian bubble due to the necessary falling prices.

[sc. Keynes’s] ... theory of involuntary unemployment is perfectly simple and can be expressed in a paragraph, or in a sentence. If you express it in a sentence, you simply say that enterprise is the launching of resources upon a project whose outcome you do not, and cannot, know. The business of enterprise involves investment, the investing of large amounts of resources--huge sums of money--in things whose outcome you cannot be certain of, which could perfectly well turn into a disaster or a brilliant success.

The people who do this kind of investing are essentially gamblers and they can lose their nerve. And if they decide to withdraw from trade, they sweep their chips up from the table. If they decide it’s too risky, if their nerve gives out and they can’t bring themselves to go on investing, they cease to give employment and that is the explanation.

----------So tell me then, anything in there have anything to do with 'confidence'? Why does it seem like Keynesians DO acknowledge the role of 'confidence' in getting private investment players in the game, but only if government deals the cards...

Is this blog, and the conversation it inspires, about Krugman or Keynes? We've really no idea what Keynes would believe or say about the current situation, he may well have changed his mind about some things, just as we all do. Priests like Krugman, however, invoke their interpretations of Keynes to legitimize their own theories, just as has been the case with Marx. Basing national economic policy on central planning, which is what Krugman is advocating, is the central issue. Men much brighter than he have demonstrated the impossibility of even measuring the success or failure of that approach except in the analysis of stupendous failures like the USSR. He rejects the role of central planner himself but feels free to critique the megalomaniacs that assume it for deviating from his own pet theories. We're fools for even taking Krugman seriously.

Charts and graphs are the typical evidence presented by Keynesians, bogus information generated by frustrated mathematicians with an inferiority complex legitimately earned by living on the same campus with physicists and chemists.

Ideas matter in American politics, no matter what you hear from the pundo/cynical class. They don't necessarily have to be good ideas. Austerity hawks have won the political debate about economic policy for 30 years on a combination of fakery, ideology and repetition. They were helped by the left's inability to articulate an alternative to be sure, but they won, and we're paying the price for it now.

In comes Paul Krugman of the New York Times. Almost single-handedly he has made the case for stimulus and investment, and disemboweled the idea that spending cuts will get us out of this long, slow glide to economic oblivion. It's been an impressive effort. He has explained the theoretical clash well. He has examined the evidence of other economies who have tried austerity and failed. He's called out the avatars of reduced spending and how their predictions of inflation in the U.S. and boom in German-dominated Europe were just wrong.

I don't sympathize with anyone on either exreme who thinks they have all the answers.The world is full of people who think they should be up for a Nobel.

Back to Krugman or is that Keynesians... Why does the fairy dust have to be spread around evenly to all? Why not have it spent specifically on things essential to the long-term health of the economy. You know, supply side, like infrastructure, R&D and training? I certainly don't see the private sector biting at the bit to do that. How much has research into pure science, for example physics, benefitted the economy, and how much of that was/is paid for with private funds? Pull out you numbers and graphs; I'm all eyes.

More normally, the private sector whines about needing things like better roads and better trained workers so it can be more competetive. Of course, it wants government to build these roads and training centers. Have your cake and eat it too!

The biggest hypocrites are those who feign objectiveness only to state subjective "truths", and then laugh at the rest of us mere mortals.

Especially on those things that will protect proprty rights, right? Like police, a justice department and, don't forget, defense - not to leave out the local fire department. Oh, my neighbor's apartment is on fire. Has he paid for fire insurance? I don't know. Well we're not comong to put out the fire until we know. It's not cost efficient.

Maybe you're one of those who has the Force with you ;-D No government. Libertarian anarchy anyone? Whoever has more, gets more, and if you don't like it, the stronger (literally) wins. Too bad if you're not the strongest. Don't have fire insurance? Pay us and we'll protect you. Now that's the Dark Side ;-)

"The good news for Abenomics keeps rolling in; of course, it’s not over until the sumo wrestler sings, but there has clearly been a major change in Japanese psychology and expectations, which is what it’s all about.

Gosh yes, I forgot how incredibly edgy and difficult the concept of a geospacial database is these days. It's probably impossible to discover who has paid their land taxes too.

The face that you can buy a GPS navigation system containing maps of every city in an entire country right down to the level of each individual building and intersection, is probably an irrelevant anomaly. I probably better mention that said GPS navigation devices only cost a few hundred bucks and fit in the palm of your hand.

I guess it's a question of whether you would rather worry, "Oh my house might perhaps burn down if I'm not paid up on my fire insurance, and if I'm also pretty careless" as opposed to the alternative "Oh the police very likely will come around and take away everything I own (even my freedom) if I haven't paid my taxes, oh yeah and there's still no actual guarantee my house won't burn down because the government built all these stupid road blocking obstacles to slow down ambulance and fire engines all over the city."

I mean, there's always something for people to worry about, isn't there?

Logging all of Krugman's ironic references to what can only be described as a government-based version of the "Confidence Fairy" has got to be a tiresome task--

Just recently, in http://krugman.blogs.nytimes.com/2013/05/12/nevillenomics/

He says:

Nicholas Crafts has a really interesting piece about UK economic policy in the 1930s. The gist is that monetary policy drove recovery through the expectations channel; the Bank of England managed to credibly promise to be irresponsible, that is, to generate inflation.

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About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).